RBI, govt to recast monetary policy framework: Rajan

The Reserve Bank of India (RBI) is planning a recast of its monetary policy framework in consultation with the central government, in a bid to make it contemporary, RBI governor Raghuram Rajan has said.

Raghuram Rajan"This year the government and the RBI will negotiate together to formulate a monetary framework for the RBI...The idea is to move towards an objective which has much more emphasis on inflation," Rajan said in a speech in Chicago.

The governor's comments come at a time when RBI's tight money policy is being increasingly criticised for ignoring investor's interest and its overemphasis on inflation targeting.

He said the focus for the RBI has been on controlling inflation and on creating a sound monetary framework. The RBI Act of 1934 does not say anything about the framework that the RBI operates under, he added.

"Since 1934 we have not figured out a framework for the RBI. Time we do it. The government and the RBI will do that," he said.

Rajan said the RBI is aiming to bring down headline inflation to 8 per cent by end of this year and to 6 per cent by the end of next year. "After that the framework will start kicking in and the government will determine what level it wants inflation at, through some kind of Act," he said.

Rajan also noted that the country's GDP growth has now picked up momentum with an uptick to 5.7 per cent in the last quarter, up from about 4.6 per cent a year ago.

While the number is reassuring, he said, there still be tremendous room for further improvement. "I do not want to jump up and down about this number. It is reassuring but we need more of it. My hope is that this year we do a 5.5 per cent (GDP growth), may be a little better" and target a growth figure around 6 per cent next year and around 7 per cent by 2016.

He noted the ballooning of fiscal deficit to 6.5 per cent from 2.5 per cent despite the government's efforts to bring it down. He said the fiscal deficit is projected to come down to 4.1 per cent this year and by 0.5 per cent every year after 2014.

He, however, said that everything is not "hunky dory" and there is still a lot that need to be done. "After you cut the deficit the second step is fix the quality of the fiscal deficit," he said.

Rajan also said the central bank is tightening norms to deal with loan defaulters. "We have also told borrowers if they hold out too long and if there is malfeasance, we will label them willful defaulters, which mean they cannot get credit from the system again for any other project. That is a pretty serious threat in India. This is a regulatory threat," he said, adding that once a borrower is labelled willful defaulter the person is a "high risk" and the central bank would even impose huge capital requirements on banks if they lent to such a defaulter.

RBI has also coined another term called "non-cooperative defaulter." He said, "If you don't pay you are called non-cooperative which again raises your capital requirements if you get a loan from anywhere, effectively again using the threat of stopping the lending to any other project this person may be involved with years down the line if they don't cooperate now."
Pointing to the need for improving ways of dealing with market stress in emerging economies, Rajan rued the archaic bankruptcy system in India that, he said, aided the defaulter as it is hard getting the money back. "We have to work on improving distress and we have been working on making sure the banks get their money back, using every instrument we have essentially creating a bankruptcy system outside the bankruptcy system," that relies on regulations as the way to enforce so as to get a little more bite in dealing with the non-performing assets.

Rajan repeated his warning that the unprecedented monetary stimulus the world's richest nations have put in place, is "setting the stage for a repeat" of the years that followed the Asian financial crisis of the late 1990s.

"Any emerging market today is going to look at the currency volatility and say 'whatever money comes in, I'm going to be careful about it, I'm going to build some reserves'," Rajan said in a speech in Chicago. "That kind of policy will depress global demand." Overseas investors pulled $8 billion from rupee-denominated debt last year, pushing the currency to an all-time low, as the US Federal Reserve signalled it would begin paring its record monetary stimulus.

On India's economic growth, Rajan said implementation of stalled projects worth $50-70 billion announced by the government will pay dividends in the income front and help drive economic growth in the short run, even though the new government may take some time to announce major reforms.

"I think the government has essentially focused on implementation because that is really the need of the hour. Lots of projects are being stuck because of environmental permissions, forest clearances," Rajan said.

"Let's get the projects back on track. The government is focused on that, it is not headline news...but it is something that will pay dividends in the short run and I think that is what they are doing," he said adding that when the number of stalled projects starts to come down sharply, "you will see something good is happening."

"In India, if you are looking for grand, big picture reforms it may take some time coming...but in terms of decentralising, in terms of doing the small stuff which adds up to the big stuff I think that is already happening," Rajan said.

He was speaking on India and the global economy at an event organised by the Chicago Council on Global Affairs on Friday.

He said people have been expecting "major changes very quickly" from the new government and they hoped that it would be move fast on a "number of dimensions that the people want them to move on."

The new government at the centre by and large has "stuck to the path the old government laid out" so that there was continuity and this has benefited India in the eyes of the international investors, Rajan pointed out.